Small but mighty: Several government agencies play a role in developing SMEs

Like many emerging markets, Egypt’s economic structure is dominated by small and medium-sized enterprises (SMEs). Estimates vary, but sources such as the OECD and Egypt’s General Authority for Investment (GAFI) assert that they account for between 80% and 90% of total businesses, and between 75% and 80% of total employment in the country.

However, like many other markets in the region, despite the strategically important role they play in the economy, SMEs are at a disadvantage compared to larger enterprises. This is due to a number of factors: they are more limited in terms of opportunities to invest in fixed capital and technological development, which is restricted by the lack of economies of scale; they suffer proportionally from higher compliance costs, which increases the impact of the legislative and regulatory framework; they have little access to external financing due to the relatively conservative lending policies of the Egyptian banking sector; and they possess narrow resources for internal training and human capital development.

GLOBAL CONTEXT: These long-term challenges have more recently been compounded by unfavourable global economic trends and domestic unrest. Although the Egyptian economy was shielded from the worst effects of the global economic crisis, its SMEs did not escape some of its deleterious effects. A 2009 World Bank assessment of the crisis’ macro-economic impact in the Egyptian context showed that Egypt’s small firms were particularly exposed to the cooling economy, losing more sales as a result than their larger counterparts.

The report also noted that while SMEs absorb a significant amount of the nation’s total employment, they are constrained in their ability to adjust to changing economic circumstances due to their limited access to finance. This challenging scenario has been made yet more problematic by the political unrest that has swept over Egypt since January 2011 and the consequent economic decline that saw GDP fall to 1.5% in 2012 from the roughly 7% seen in the three years prior to the global economic slowdown, according to the IMF.

STRATEGY: The government’s interest in boosting SMEs’ economic role can be traced back at least a decade to when the Ministry of Finance (MoF) introduced a special tax regime for the sector. However, in terms of strategy, no single government body bears full responsibility for the implementation of the government’s SME plans, which are instead deployed through a number of institutions. One of the most important in this regard is the Social Fund for Development (SFD), established in 1991 as the government sought to mitigate the effects of its macroeconomic policy of market liberalisation.

The funds developmental remit is wide and includes developing community-level initiatives, mobilising national and international resources, and working with governmental bodies, non-governmental organisations and private sector groups to provide more employment opportunities. Its role has always included aiding the development of small businesses, but the promulgation of Law 141 of 2004 granted it an explicit mandate to support SMEs in terms of access to finance, establishment, licensing and similar matters. The law established the SFD as the principal coordinating agency in micro and small enterprise (MSE) policy development and implementation.

For MSEs one of the SFD’s most useful programmes is its partnership with a number of local banks to provide development financing. These include both private lenders, such as Audi Bank, and state-owned institutions like the Industrial Development and Workers Bank of Egypt and the National Bank of Egypt (NBE). As of the end of February 2012, the total disbursed to small firms stood at LE1.52bn ($216.2m), of which LE1.24bn ($176.45m) was channelled through partner banks. Micro enterprises, meanwhile, had received SFD funding through civil societies or partner banks totalling LE628.3m ($89.4m).

PLAYING A BIG ROLE: The Ministry of Trade and Industry also plays an important role in the provision of support to SMEs. It does so through three entities: the Industrial Modernisation Centre (IMC) is mandated with the task of improving the performance and competitiveness of Egyptian industries, assisting them in entering global markets, and creating job opportunities in the industrial sector; the Industrial Development Authority is primarily occupied with land allocation and registration for SME industrial projects; and the Egypt Technology Transfer and Innovation Centres (EETICs) are tasked with developing research and development capabilities in a number of targeted industries.

The Ministry of Investment, and its investment promotion agency GAFI, represents a third institutional pillar in the government’s approach to SMEs. GAFI offers a single access point to a wide range of SME services, such as company registration, site location and contract and license procedures, among others. Since 2008 it has been implementing its Small and Medium Investment Strategy, which aims to encourage job creation by establishing incubators to develop technology-based projects; establishing SME clusters in free zones and special investment zones; improving access to finance by setting up funds in cooperation with international donors; and enhancing its business development services (BDS) by establishing a network of offices and working with SMEs through a web portal.

The principal difference between GAFI and the SFD in their approach to SMEs is GAFI’s propounding of corporate principles by which, in its own words, it aims to “shift the emphasis from enterprises to entrepreneurship”, and thereby “change youth from job seekers to job makers.”

Finally, the MoF has operated a SME development unit tasked with policy formulation and research since 2000. Since then it has continued to produce a number of publications and policy documents, the most significant of which is the national strategy to improve SME competitiveness, which was approved by the prime minister in 2004. However, while the SME unit has become prominent within the public discussion regarding SME policy and regulatory reform, it does not have a mandate to implement policies and is therefore limited to a guidance role.

BEYOND GOVERNMENT: In addition to the institutions by which Egypt implements its policy and directly interacts with SMEs, a number of international SME support organisations work within the sector – in some cases in partnership with the government. The Canadian International Development Agency (CIDA), which works closely with the government of Egypt, is one such organisation. It has been operating in Egypt since 1976, and by 2010 had disbursed nearly $1bn in support to hundreds of projects under its programme – one of the primary goals of which is to provide employment opportunities by funding small and medium businesses. The US Agency for International Development does similar work, partnering with HSBC Bank in 2011 to provide $34m in financing to local SMEs over a nine-year period.

Other SME support organisations operating in Egypt have a regional footprint. The Egyptian division of the Education for Employment Foundation, for instance, has a network that includes Egypt, Jordan, Palestine, Morocco, Tunisia and Yemen, and partners with local businesses in designing training programmes and preparing graduates for high-growth businesses – in Egypt’s case, banking and textiles. Other significant non-government SME support organisations include Efham, a programme that aims to enhance the role of Egyptian youth in economic and political life; the Egyptian Junior Business Association, which has more than 420 members representing 170,000 employees and is chiefly concerned with advocating for policies that enhance the regulatory framework applied to small businesses; and the Alexandria Business Association, which runs a series of microfinance credit programmes for SMEs. Additionally, around 12 incubator programmes have to date been established in the country.

OPTIONS: Egypt’s smaller firms have a wide choice of routes to assistance, with programmes and funding available from government, non-government and international institutions. However, while this variety is of benefit to Egypt’s SMEs, the numerous institutions responsible for SME policymaking are in fact a potential hindrance to their development. A recent report issued by the steering groups of the Middle East and North Africa-OECD initiative stated that Egypt “consider restructuring the institutional framework for the design and implementation of SME policy”, and that a “system of communication should be devised to ensure that overlapping policies and inconsistencies are identified and rectified”. Establishing a greater degree of cohesion regarding the nation’s SME strategy may be a good starting point for the administration that emerges from the nation’s troubled political transition.